NCUA Discusses St. Paul Croatian's Failure

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ALEXANDRIA, Va.-The dust has yet to settle on the failure of St. Paul Croatian FCU, with the FBI continuing its investigation into the alleged criminal activities that led to what may prove to be the largest-ever loss to the NCUSIF — $170 million.

The credit union has been liquidated, all insured shares have been paid out, and law enforcement is pursuing additional recoveries. The NCUA Office of Inspector General completed its review of the loss and found NCUA performance to be lacking in many areas (see related story).

Credit Union Journal requested an interview with NCUA to discuss a number of matters surrounding the demise of St. Paul Croatian FCU — including how so many red flags were overlooked or missed — and what steps the agency is taking in light of its own internal report that is critical of the agency. NCUA chose to reply with a written response to those questions from David Small, NCUA assistant director of Public Affairs, Office of Public and Congressional Affairs.

Credit Union Journal: The big question for many credit unions related to St. Paul Croatian--How did so many red flags go missed, especially the booming loan portfolio and the 0.000% delinquency rate?
Small: At St. Paul Croatian, insiders acted in collusion to create fictitious loans and prevent the detection of fraud for an extended period of time. NCUA continues to re-evaluate its examination and supervision processes, incorporate lessons learned from all credit union failures, and conduct examiner training to minimize future losses to the NCUSIF.

CUJ: How does the OIG come to investigate certain failures or study certain issues?
Small: The OIG is statutorily required to conduct material loss reviews-which are audits, not investigations-under certain conditions. Specifically, the Federal Credit Union Act requires that the OIG conduct an MLR when the NCUSIF has incurred a material loss with respect to a credit union. A material loss is defined as (1) exceeding the sum of $25 million and (2) an amount equal to 10% of the total assets of the credit union at the time at which the board initiated assistance or was appointed liquidating agent.

Prior to the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the monetary loss threshold was $10 million. Dodd-Frank amended the threshold to $25 million.

CUJ: What typically happens in wake of an OIG report?
Small: The OIG issues its draft reports to the NCUA board and NCUA management. NCUA management provides its response to the observations and recommendations detailed in the report. This response is included in the back of the report as an appendix. Based on the proposed corrective action or actions taken to date, the OIG will make a determination if the response addresses the MLR's findings and recommendations.

The OIG follows up on report recommendations approximately six months after issuance to determine if the agency has taken adequate corrective action.

CUJ: What steps has NCUA taken to address the OIG report related St. Paul Croatian?
Small: NCUA has enhanced quarterly risk reports; issued written guidance emphasizing review of risk triggers, offsite monitoring, concentration risk, and administrative remedies; conducted training lessons learned from fraud-related credit union failures; re-emphasized review and verification of data processing system functions and internal controls, and revised minimum scope procedures.

CUJ: What lessons have been learned from SPCFCU's failure and resulting policies or procedures changed?
Small: In response to the St. Paul Croatian failure and the OIG's ensuing MLR, NCUA has revised minimum examination scope requirements, revised examiner and team rotation policies, and conducted training with examiners on improved offsite monitoring tools, reviewing red flags and general ledger reconcilements, and utilizing effective administrative remedies.

CUJ: Any NCUA personnel moved around or affected as a result of this failure?
Small: NCUA does not discuss personnel matters. In connection with this or any credit union failure, we evaluate our practices in light of what occurred and when appropriate make changes based on lessons learned to minimize the likelihood of a reoccurrence.

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